Insurance World

Well, another tax season has come and gone. When it comes to taxes, there are two things to worry about, filing on time and audits. Since a majority of people have filed their taxes by now, we thought it would be beneficial to talk a little about IRS audits. Here is a look at some facts you should be aware of when it comes to being audited by the IRS.

The first thing you need to be aware of is that the IRS is being way more aggressive with audits than it has in a long time. We have all seen the recent financial drama caused by Government spending, which has dramatically increased in the last 10 years. For example, from 2002 to 2008 the national deficit increased 3.5 Trillion Dollars. And from 2009 to the present the national deficit has increased almost 2.5 Trillion Dollars more. How does the government plan to pay for the increase in debt? Well, the main source of funding for the government is through taxes. This means that the IRS is increasing, and will continue to increase, its efforts to collect taxes to help fight this dramatically increasing debt. The IRS will do this through auditing individuals and small businesses.

In addition to standard IRS audits, there is an increase in IRS letters going out questioning various tax deductions claimed on tax returns. Many people don't know how to deal with these letters from the IRS, so they just pay the bill and end up paying anywhere from a few hundred to a few thousand dollars in unnecessary tax.

Another way we can tell that audits are increasing is the amount of auditors being hired by the IRS. For example, a few years ago there were only two auditors in the entire state of Utah. Now there are over twenty. And in addition to more auditors, we have also noticed an increase in auditors making in person contact with individuals they suspect of owing tax by going to their homes and places of business. It has been years since we have seen actual IRS auditors going to someone's house or job. But in the last six months, we know of three people have an auditor show up in person to their home or work.

We are not giving you this information to scare you but to motivate you. We simply want you to know that you should be prepared.

There are several things you can do to be prepared. One great resource can be found at http://avoidbeingaudited.com/. They have some great tools to help you avoid being audited and to help you in case you are audited.

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It's that time of year again... time to file your income tax return.

What if you can't get it done or don't have all of your material to prepare it?

File for an extension.

There are many reasons taxpayers may want to file an extension. Procrastination is right at the top of that list. For others however it may be that all of their tax documents have not arrived yet. The Form K-1 (From partnerships, subchapter S corporations and estates and trusts) may not be received so as to prepare a return by the due date.

To file an extension, complete Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return. This must be completed and filed by the due date, normally April 15. For 2010 returns it is April 18, 2011. The extension is granted automatically if it is filed completely and on time. The extension is for six months and allows for the returns to filed up until October 17, 2011.

Taxpayers must also file an extension in the state they are a resident of and any other states they may be required to file in. In Connecticut, taxpayers must file Form CT-1040- Ext, Application for Extension of Time to File Connecticut Income Tax Return for Individuals.

The extension merely extends the time to file the return; it does not extend the time to pay any taxes due. If taxes are due, they should be paid when the extension is filed.

Taxpayers that want to fund a Traditional IRA or a Roth IRA for 2010 need to have this made by April 18, 2011. Taxpayers with enough earned income that meet certain income requirements, can fund up to $5,000 into an IRA, Roth IRA or perhaps some combination of these. Taxpayers age 50 and older can make an additional $1,000 contribution in a so-called "catch up" contribution.

Taxpayers that are self-employed and want to fund a Simplified Employee Pension ("SEP") have until the due date of the returns, including the extension to fund this. In other words, if you want to fund your SEP, you can file the extension and this will allow up October 18, 2011 to fund this account.

As with other tax forms, we recommend the application for extension be mailed by Certified Mail-Return Receipt Requested.

This will provide you with proof of mailing.

ACTION ITEM: If you can't file your income tax return by April 18, 2011, file an extension.

Thomas F. Scanlon, CPA, CFP® is the President of Borgida & Company P.C., CPA's in Manchester, CT and can be reached at http://borgidacpas.com/

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